FW: General Dynamics (GD): Expect G650 to be Strong Seller Soon

• Deposits due April 15 for early G650 slots: While no G650 orders were announced with the launch, deposits are due April 15 for early slots and we expect significant initial order activity. GD doesn’t believe the G650 will cannibalize its existing G550 backlog which runs into 2012. While G550 customers could look to trade up, GD believes that the significant price differential (~$15M) and longer wait for the G650 will sustain the G550 backlog.
• New prod facility geared for 60-70 aircraft, we think can go higher: GD has built a new separate facility for G650 production that will be much more highly automated than its existing production facility. GD stated that it expects to deliver 10-15 G650s in 2012 while the facility is geared to handle 60-70 aircraft annually. Given that the new facility is much bigger than GD’s existing production facility we believe it can handle even more aircraft and will likely eventually build more aircraft types than just the G650.
• Supplier participation payments to cover 1/3 of G650 dev costs: GD commented that supplier participation payments are much higher on the G650, covering about a third of its total development costs. GD noted that more than half of its G650 development costs are behind, although total Gulfstream R&D is likely to remain in 2-3% of sales range as it continues to level load its R&D. Beyond the expected G250 announcement later this year, GD also strongly hinted that the G650 will likely serve as the basis of a future new large cabin product family.
• $106 price target: Our PT continues to reflect our DCF analysis (3% terminal growth; 10% WACC).

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